The biggest domestic event in Germany in 2006 was undoubtedly the country’s hosting of the Fédération Internationale de Football Association (soccer) World Cup, eventually won by Italy. (SeeSports and Games:Sidebar.) Although the run-up to the event was in part overshadowed by concerns about an apparent rise in violence toward foreigners, particularly in the east of the country, such concerns turned out to be unfounded. Not only was Germany’s hosting and organization of the event widely praised, but there were also suggestions that at least some German citizens increasingly felt able to take a degree of pride in their identity, which for a long time had been overshadowed by the legacy of Germany’s past.

German association football (soccer) stars David Odonkor (left) and Lucas Podolski join the …

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Away from football, attention in the political sphere focused upon the reform attempts of the grand coalition of Germany’s two largest parties, the Christian Democratic Union/Christian Social Union (CDU/CSU) and the Social Democratic Party (SPD). This coalition government had been formed after the incredibly close election result of September 2005. The list of policy challenges facing the coalition was extensive and included reform of Germany’s generous but expensive health insurance system; an overhaul of the federal system; changes to the corporate tax system; reform of the so-called Hartz IV legislation on unemployment benefits, introduced by the previous government; pension reform and the potential raising of the retirement age from 65 to 67; and the need to bring Germany’s annual budgetary deficit back within the criteria stipulated by the European Union.

The grand coalition enjoyed a substantial majority in the Bundestag, the lower house of Parliament, as well as control of the Bundesrat, the chamber of federal state government representatives. As a result, smaller opposition parties—the Free Democrats, the Greens, and the Left—had little hope of overturning the federal government’s legislative proposals. Reaching agreement between the two coalition partners proved far from easy, however, and during the summer months the contentious debate within the government over proposals for the reform of the health insurance system threatened the survival of the coalition. Tensions became apparent not just between the two parties but also within them, especially within the CDU/CSU as Chancellor Angela Merkel came under pressure from the party’s so-called regional “barons”—those premiers of Germany’s constituent federal states that belonged to the CDU/CSU.

This debate, fought out largely in public during the summer, had clear negative implications for the popularity of both the chancellor and the CDU. Opinion polls in late summer and early autumn showed the party continually slipping in popularity, while the SPD gradually began to gain support after having suffered a dip in popularity in the early part of the year. Opinion polls also suggested that a growing number of German citizens did not believe that the grand coalition would last its full term in office. The chancellor’s personal popularity rating also fell, having started the year as Germany’s most popular chancellor ever—largely as a result of her perceived foreign policy successes—as questions were raised over her management of both the squabbling government coalition and her own fractious party.

Nevertheless, after a tardy introduction of the coalition’s reform plans, by the autumn a number of measures had been agreed upon. The slow start occurred because important elections were being held in three states in March—Baden-Württemberg, Rhineland-Palatinate, and Saxony-Anhalt. Defeat for the ruling administrations in any of these states could have spelled problems for the introduction of necessary reforms, particularly if they had further weakened the SPD after its poor state election results in 2005. The ruling majorities were maintained in each case, however, so after a four-month “honeymoon period,” by the end of March the grand coalition was tackling serious reform issues.

Among the decisions taken was the first part of the federal reform package, a piece of legislation requiring some 20 constitutional amendments, which was passed by both houses in July. The second part of the package, aimed at reforming Germany’s federal fiscal equalization system, was due to be negotiated in 2007. Agreement was also reached on a reform of the corporate tax system and an increase in tax rates for Germany’s highest earners.

An unpopular measure was the agreement to raise the official retirement age for German workers from 65 to 67 as a consequence of demographic pressures. The measure was to be phased in over the course of the next three years, though it would not apply to all categories of workers. The most difficult domestic policy issue for the government, however, proved to be the health insurance reform. Negotiations began in March and concluded in late September, with an uneasy compromise struck between the two coalition partners, which overrode dissension in the party ranks. The main sticking points were the very different conceptions of the two parties over how the insurance system should be funded and what role private health insurers were to play in the financing of the health care system.

On November 15, pharmacists in Düsseldorf take to the streets to show their concern that the …

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In the state elections held in September in Mecklenburg–West Pomerania and Berlin, concern was once again raised by the electoral successes of the right-wing National Democratic Party (NPD). In Mecklenburg–West Pomerania, Chancellor Merkel’s home state, the NPD achieved 7.3% of the vote and easily cleared the 5% barrier necessary to take up seats in Parliament. Mecklenburg–West Pomerania was one of Germany’s poorest regions, with an unemployment rate hovering around 18%, nearly twice the national average. The NPD also held state parliamentary seats in Saxony, and the German People’s Union (DVU), another party of the right, was represented in Brandenburg and in Bremen.

Security concerns were heightened in August when two undetonated explosive devices were found on trains in the west of the country. This discovery was followed by the arrest of a suspect based upon closed-circuit television footage. This unleashed a new debate in Germany about the balance between the safeguarding of civil liberties and the importance of ensuring security, a debate that grew to incorporate the political row over the introduction of an antiterrorism database for use by the German security services.

Foreign Affairs

Both Chancellor Merkel and Foreign Minister Frank-Walter Steinmeier (SPD) were well received on the international stage. Merkel was praised for the rapprochement she attained with the United States while still maintaining a critical approach on issues such as the perceived human rights abuses in Guantánamo Bay, Cuba. Her first visit to Washington in January was warmly greeted in the United States, and the improvement in personal relations with U.S. Pres. George W. Bush, over the days of Chancellor Gerhard Schröder, was clearly evident. Merkel’s approach made it clear that she was prepared to raise sensitive issues with the U.S. administration, but she did so in the context of emphasizing the importance of the relationship between the two states. Bush paid a reciprocal visit to Germany in July, prior to the Group of Eight summit in St. Petersburg, and visited Merkel’s parliamentary constituency in the east.

A change in tone was also evident in the German government’s relationship with Russia. Schröder’s relationship with Russian Pres. Vladimir Putin had been warm and cordial. Merkel established a more-formal relationship with the Russian leader, although the relationship with Russia remained intense, not least because of the agreement, originally signed under the Schröder government, to build a pipeline under the Baltic Sea to supply natural gas to Germany.

The intended construction of this pipeline was just one of many sources of tension between Germany and Poland over the course of 2006. One Polish minister went so far as to liken the omission of Poland from the deal to the Molotov-Ribbentrop Pact, which led to the division of Poland between the Soviet Union and Nazi Germany during World War II. Other sources of tension included an exhibition that opened in August in Berlin and featured the experiences of European expellees, including Germans deported from Poland, following World War II; an insulting reference to the Polish president in a German newspaper; and a proposal, later dropped, by one of the junior partners of the Polish coalition government to reduce the safeguards protecting the rights of the German-speaking minority still resident in Poland.

During 2006 the German military embarked on two new overseas deployments, an issue that was still deeply controversial in Germany. The first mission was to head the EU’s rapid-reaction force deployed to Kinshasa, Democratic Republic of the Congo, and Gabon to assist the 17,000-strong UN peacekeeping force in overseeing presidential elections in the DRC. The second action was far more controversial: the first German deployment to the Middle East since the end of World War II. Following the approval by the Bundestag in mid-September, two frigates, four fast patrol boats, two supply ships, and two helicopters of the German navy were sent to patrol the Lebanese coast following the cessation of hostilities between Israel and the Hezbollah militia present in southern Lebanon. Their objective was to prevent arms shipments from reaching Hezbollah. Of crucial importance to the debate over the deployment was the possibility, however slight, of German forces’ being placed in a position where they might end up firing upon Israelis. The question of military deployment near Israel proved particularly sensitive, demonstrating that the legacy of World War II continued to influence the debate over Germany’s global role.

Alongside the U.K. and France, Germany—as one of the so-called EU-3—played a major role until autumn in trying to find a diplomatic solution to the continuing crisis generated by Iran’s uranium-enrichment program. The failure to reach a diplomatic solution, however, led in October to the European Union’s decision to pass the brief back to the UN Security Council. Inside the EU, Chancellor Merkel developed a reputation as a mediator, largely on the basis of her achievement in helping the EU’s budgetary negotiations for the next multiannual perspective reach a successful conclusion in December 2005. A positive development for Germany came from the EU’s decision to end the threat of legal action against Germany for its ongoing breach of the budget-deficit criteria after it became clear in the autumn of 2006 that Germany’s annual budget deficit would come down below the 3% of gross domestic product specified by the EU’s criteria on fiscal responsibility.

The Economy

One of the key reasons for the suspension of action against Germany because of its budget deficit was the ongoing revival of the German economy, which gathered pace throughout 2006. After a stuttering start to the year, the economic recovery of Germany, and of the euro zone more generally, strengthened throughout the second and third quarters. In addition, tax revenues proved higher than anticipated, which also contributed to reducing the budget deficit.

The grand coalition was criticized for its 2006 budget, which required extensive reworking in order to balance. In fact, this budget was technically unconstitutional, because borrowing exceeded investment, but it was justified by the government on grounds of exceptional circumstances. Further criticism focused on the fact that rather than trimming state spending, for example through the Hartz IV reform, there was a focus upon increased tax revenues; another move by the grand coalition was to announce a three percentage point increase in the rate of value-added tax to be implemented in January 2007. This move was expected to encourage an upturn in consumer spending in the latter part of the year as consumers moved to make large purchases before the new rate took effect. Consumer spending remained relatively flat, however, with economic growth being once again led by exports and industrial productivity. Nevertheless, the strengthening economic revival led to an upward revision of predicted growth rates for 2006, as well as increasingly optimistic assessments for 2007.